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How to Finance the Purchase of a Business

April 24, 2023

Buying a business can be very costly and often requires that the purchaser obtain financing. Since there are multiple ways to finance the purchase, it is helpful to get legal advice. An experienced business attorney can provide invaluable guidance on determining the best type of financing for your situation as well as help negotiate terms and execute the necessary documents to close the deal.

What Are the Key Factors in Determining Your Financing Options?

Before you start looking for financing, you must consider several essential factors. These include:

  1. What Are You Buying? Your financing options vary depending on the type of asset or interest you are buying. For example, if you are buying a business that sells musical instruments and provides lessons, are you purchasing all of the inventory, the building, shares in the corporation that operates the business, or something else? Alternatively, if you are purchasing a closely held business, you may be buying the shares of all or some of the shareholders. Note that in some cases you may need to purchase the equity in the business in order to maintain important business licenses and registrations that would not be transferable if the purchase were to be structured as an asset purchase.
  2. How Much Are You Paying for the Business? Your funding choices will also depend on the purchase price. A business that is under $100,000 will need very different financing than a multi-million-dollar deal.
  3. Does the Purchase of the Business Include Real Estate? If the company being purchased includes real estate, the purchase price is likely going to be higher and the financing may incorporate a mortgage on the property. 
  4. What Are the Seller Requirements? Your financing may be affected by conditions imposed by the seller. For example, does the seller want a fast closing, an all-cash deal, or continued use of a portion of the space occupied by the business? 
  5. Who Is the Purchaser? The purchaser is the one who must seek and apply for financing whether that is a single person, a corporation, or another entity. If the purchaser is a corporation, financing through a bank may require an individual owner of the corporation to sign a personal guarantee. 

What Is the Best Financing for Your Purchase?

Once you have considered the factors above, you can evaluate your financing options and determine the best choice for you and your business. The following are three typical options for financing the purchase of a business: 

  1. Seller-backed financing. In smaller transactions, the seller may be willing to fund the purchase of the business. The buyer provides a down payment at closing and then pays back the remainder of the purchase price directly to the seller over an agreed-upon period of time, with interest. In this situation, the parties will need to execute a promissory note to outline the terms of the financing. The parties may also wish to draft and execute additional documents to provide security and/or collateral to back the loan. 
  2. Small business loan. SBA loans can be used to purchase real estate, equipment, or a business. They typically have attractive interest rates and repayment terms but have stricter qualification requirements and financing caps than a bank loan.
  3. Bank loan and/or mortgage. If the purchase of the business includes real estate and it is of sufficient value, it may make sense to mortgage the property and use that money for the purchase. Depending on the type of business and the amount of the purchase price, there may be many banks willing to provide money. You should obtain financing offers from multiple banks as it is important to compare interest rates, repayment terms, as well as other terms of the mortgage (e.g., will the bank require the buyer to hold all business accounts with them, when will the interest rate renew, etc.). 

How Can Our Attorneys Help You with the Purchase of a Business?

Our attorneys are experienced in every step of buying a business, including financing. We understand that making the right choice about financing can have a significant impact on the future of the business.  We can help guide you to make a well-informed decision. Contact us for a consultation to learn how we can assist you in setting your business up for success.

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